Wholesaling

Wholesaling involves purchasing goods in bulk from the manufacturer and then reselling them to the retailer for a profit. A wholesaler is an individual or business connecting the producer with the retailer and constituting an integral component of the supply chain. They can sell a single product, a wide range of products, or both.

Besides physical product distribution, wholesalers are popular in banking and finance, telecommunications, and energy. They provide business-to-business (B2B) services to enterprises in industrial, commercial, and other professional sectors at discounted prices. Though they sell items to retailers at a higher price, it is still much less than the typical retail price.

• Wholesaling is the act of buying large quantities of items from a manufacturer and reselling them to merchants, who subsequently sell them to consumers.
• It is a regular occurrence in industries such as banking and finance, telecommunications, and energy, in addition to physical product distribution.
• The common types of wholesalers include merchant, merchandise agents or brokers, manufacturer’s mini offices or branches, and specialized.
• In some cases, producers and service providers can be wholesalers. However, given the cost of manufacturing and machinery, operating expenses, and capital requirements, it might be difficult for a wholesaler to be a manufacturer.

Wholesaling means purchasing large quantities of goods from the producer and reselling them to retailers, who then sell them to end-users. This entire process depends on the concept of economies of scale.

To begin, a wholesaler invests in buying and storing large amounts of products. They then profit from selling those products in small quantities to merchants in a town, city, or marketplace. The concept gained traction in the 19th century, following the success of mass production and marketing strategies.

There may be multiple wholesalers selling similar or diverse products from a single manufacturer. Similarly, a single wholesaler may sell to a large number of retailers. It is worth mentioning that companies, such as producers and service providers, can be wholesalers in some situations. Since wholesaling is a vital component in the distribution channel, it has a significant economic impact.

Manufacturers connect with wholesaling companies to get their products efficiently delivered to retailers and ultimately consumers. The manufacturer, wholesaler, retailer, and consumer form the part of the supply chain in this fashion, each functioning on their level and reliant on the one above them.

• In addition to wholesaling products, wholesalers perform many other functions, such as promotion, warehousing, transportation, financing, management and consulting, market intelligence, risk-taking, etc.
• Wholesalers have a greater price control due to operating or warehousing expenses that fluctuate based on process efficiency, costs of goods and services, and inventory turnover.
• They usually do not provide after-sales service or product support as they are not manufacturers and primarily sell competitive products.

Based on their line of business and functions, the wholesaling definition can be of the following types:

#1 - Merchant

The wholesaler buys vast quantities of products from the producer, takes ownership of them, stockpiles them, and sells them to anyone other than the consumer. They work independently and are mainly of two types:

Full-Service Wholesalers

They provide a wide range of services, from inventorying to delivering products to retailers. Furthermore, they assist with credit and management issues and provide complete customer support to retailers. The most prevalent types of them are wholesale and industrial merchants:

• Wholesale Merchants: They sell to retailers and are common in hardware, pharmaceuticals, clothes, and seafood businesses.
• Industrial Merchants: They sell to producers and are common in consumer durables, engineering, machinery, and equipment businesses.

Limited-Service Wholesalers

These wholesalers store products in a small place, operate on a smaller scale, and provide fewer services to manufacturers, suppliers, and end-users.

#2 - Merchandise Agents or Brokers 

Merchandise agents are wholesalers who purchase products from various producers to resell them. They do not, however, take possession of the goods. Instead, they assist with their storage and display.

On the other hand, merchandise brokers act as a negotiation link between the manufacturer and the retailer. They profit from commissions earned on sales, as seen in insurance, stock, and real estate markets.

#3 - Mini Offices And Branches

The manufacturer sets up a new branch or opens a mini-office to take part in the wholesale process. These branches or offices directly take purchase orders and sell items to retailers. They focus on inventory management, advertising, and sales, with a specific geographic region in mind.

#4 - Specialized

These wholesalers specialize in a specific product or commodity and are well-versed in its benefits and drawbacks.

Let us look at a few examples of the wholesaling market to have a better understanding of the concept:

Example #1

Martin runs a wholesale business of soft drinks and supplies and delivers hundreds of crates per day to fast-food restaurants and hotels in his neighborhood. He puts bulk orders for cold beverages with their producer at a substantially reduced price based on market demand.

To accommodate consumer demand, all restaurants and hotels contact him to deliver a particular number of batches at a discounted price. These restaurants then offer soft drink bottles to their customers at a higher price. As a result, Martin and his network of retailers maintain a relationship and profit from their lines of business.

Example #2

Increased online sales have put downward pressure on branded product prices, forcing manufacturers to tighten their pricing rules. Prada, the Italian luxury fashion brand, has declared that it will cut the number of its wholesalers in Italy and other parts of Europe.

The initiative aims to set uniform prices for company products while minimizing discounts. The fashion house also feels that eliminating end-of-season incentives will provide pricing uniformity across different retail channels in an increasingly fragmented wholesaling market. Prada intends to expand its wholesale network to include e-retailers to increase profits and retain control of its brand for long-term growth.

Example #3

The supply chain process benefits both the wholesaler and the retailer. However, reducing their presence in the network may help the company increase earnings. For example, Nike made some substantial changes in its distribution strategy in 2019. Nike's expansion plan included a reduction in the number of merchants selling its goods and the termination of supply agreements with independent stores.

The wholesaling definition encompasses not only the physical distribution of goods but also banking and financial services. Wholesalers operate as underwriters or mutual fund sponsors for asset management firms looking for investors.

Real estate developers, pension funds, and other institutional clients, rather than merchants, are among their clientele.

Both wholesaling and retailing are essential for a supply chain to function. A wholesaler focuses on maintaining partnerships with retailers and manufacturers and serves as a conduit between them. Retailers do not contact company officials directly in cases of product shortages, supply concerns, price rises, discount offers, or complaints. Instead, they go to the wholesaler.

On the contrary, retailing simply refers to a local shop owner who purchases large amounts of items from a wholesaler and sells them directly to consumers. End users see retailers as the company's face.

When wholesalers acquire a good deal or a discount on purchasing items from a company, they pass it on to retailers. Merchants then pass it on to end customers, ensuring profit and fairness for all.

Other striking differences between wholesalers and retailers include:

• Wholesalers resale products in bulk and at lower prices to retailers, industries, and other groups since they incur no further expenditures. Due to additional costs, retailers sell items in smaller quantities and at higher rates to end customers.
• Wholesaling companies function as a go-between for producers and retailers. Retailers act as a go-between for wholesalers and customers.
• Wholesalers are often enormous, need a significant amount of money, and have lower profit margins. Retailers are small businesses with low capital requirements and high-profit margins.

This has been a guide to Wholesaling and its meaning. Here we discuss how wholesaling works along with its functions, types, and examples and its differences from retailing. You can learn more from the following articles -

• Trading House
• Supply Chain Vs Value Chain
• Electronic Commerce